State One Stockbroking has maintained its speculative buy (higher risk) recommendation for Altech and has revised its target price from 16 cents to 17 cents.
Following is an extract from State One’s March quarter (3Q FY19) report on Altech:
• Stage 1 construction progressing at the HPA plant in Johor, Malaysia.
• Exclusive mandate established with Macquarie Bank (ASX:MQG) for up to US$90m in mezzanine debt. Completion of a mezzanine facility is conditional upon MQG’s view of all due diligence outcomes and agreement with the senior lender (US$190m) German governmentowned KfW IPEX -Bank on inter-creditor arrangements.
• In mid-April, ATC announced the successful completion of an A$18m (before costs) share placement @ A$0.1085 per share (~ 16.5% discount to closing price on date of trading halt). The placement was anchored by two German institutional investors (Deutsche Balaton and Delphi) and existing ATC shareholders SMS Investments and the Melewar Group. Note: SMS are also committed to an equity contribution of ~A$13m at project financial close. Proceeds from the placement will be mainly applied to Stage 2 engineering and construction of the HPA plant.
State One comment
The official ground-breaking ceremony at the Johor HPA site took place on 8 August 2018; Stage 1 construction is progressing, and now, with more equity financing secured, Stage 2 construction can commence.
However, while the (nonbinding) mezzanine financing arrangement with MQG shows that progress on the final financing structure is advancing, progress is slower than we expected.
After extensive due diligence carried out by the senior lender, it looks (from the outside) like MQG is “reinventing the wheel” and largely going through the whole process again.
ATC states that Macquarie’s in-house financial modelling of the project is largely completed, with the principal outstanding input being the HPA price forecast.
This will be supplied by London-based CRU Consulting, which has been commissioned by MQG to conduct a HPA market report.
Note: the current spot price of 99.99% HPA in Japan is ~US$40,000/t. In our model, we assume a long-term (real) HPA price of US$25,000/t.
Our base case forecast of HPA production commencing in FY22E (at ~25% plant operating capacity) is predicated on ATC obtaining full project financing of US$280m (A$400m) in FY19E, followed by a two-year construction period.
Based on the time is has taken to date, we suggest that it may be stretching expectations to get any mezzanine debt agreement signed sealed and delivered by June 2019.
Risk-weighted target price: A$0.17ps (A$0.16ps previously)
Our estimated post-tax NPV7.5 for the HPA Project is A$711m (see initiating coverage “HPA – a “sapphire”-hard act to follow”, 31 October 2018).
Adjusting for assumed project debt of A$400m, our un-risked equity valuation is A$315m (unchanged) or A$0.43 per fully diluted share.
While ATC’s recent announcements indicate that progress is being made, continued poor visibility on the timing of a complete project funding solution suggests that it is appropriate to maintain a deep project-risk discount.
We note there have been no updates on previously mooted stream finance facilities or on a partial project sale to a JV partner.
However, we view the latest successful capital raise as ongoing market endorsement of the project; consequently, we have lowered our risk discount to 60% (70% previously)
Attaching a 60% project-risk discount, we calculate ATC’s risk-adjusted equity value at A$126m or A$0.17 per diluted share.
At current share price levels, we believe that ATC offers risk adjusted upside potential and maintain a Speculative Buy (Higher Risk) recommendation.
Our risk discount could largely unwind if ATC successfully and timeously secures the required funding balance. Thus, positive funding news could act as a significant share price catalyst.